I explore the economic implications of learning by doing by borrower entrepreneurs who are initially imperfectly informed about their innate abilities. It is shown how entrepreneurial learning worsens the adverse effects of moral hazard, causing the possible disappearance of otherwise viable credit markets and thereby decreasing social welfare. The reason is that learning reduces subjective uncertainty about risky future outcomes, thus encouraging excessive risk-taking behaviour.
|Number of pages||10|
|Journal||Journal of Economic Behavior and Organization|
|Early online date||27 Oct 2005|
|Publication status||Published - Jan 2007|
- credit markets
- learning by doing